Loonie on track for second-biggest decline ever as pressures pile up

The Canadian dollar is on track to see its second-biggest decline on record against the U.S. dollar, and analysts forecast the currency could go lower before it bounces back next year.

The loonie is now down nearly 17 percent against the greenback for 2015, the biggest drop since 2008, if this lost 18.6 per cent from the U.S. dollar due to a collapse in commodity prices.

With nine trading days left around, analysts say the record might be tested as a monetary policy divergence between the U.S. Fed and Bank of Canada pressures the loonie.

“The Canadian dollar is expected to increase in second half of 2016, but the currency could be in for more pain soon as markets still speculate if the Bank of Canada could cut rates one more time before an expected rate rise in the second 1 / 2 of next year,” said RBC economists in a note to clients.

The Canadian dollar added 0.03 of a U.S. cent to 71.71 US cents Friday, a day after slipping below 72 US cents the very first time since May 2004.

The disappointing economic data on Friday – consumer prices rose under expected in November and wholesale trade experienced an unexpected contraction in October – continues a string of worse-than-expected readings in the past few months, adding to the slew of pressures the loonie has faced this season. Oil prices, another driver of the dollar, have fallen to levels not seen since 2008.

In yesteryear, a low Canadian dollar has been a boon for Canada’s manufacturing industry. Despite its recent slide, however, manufacturing and exports have yet to add a boost to Canada’s economy.

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“Due to strong competition from other countries, Canadian manufacturing still isn’t positive many were narrowing in on and will probably be a negative for October GDP in a few days,” said Andrew Grantham and Royce Mendes, economics at CIBC World Markets. “Continued disappointments on the growth front may have markets pricing in a greater probability of a BoC cut, weighing on the C$.”

The overnight index swap markets are currently pricing inside a rate cut from the Bank of Canada in the middle of 2016, which is unlikely that the loonie could move higher against the U.S. dollar until the central bank clearly spells the direction it promises to take monetary policy within the year.

“(The loonie) is now testing the 1.400 level (against the U.S. dollar) and given that it has finally started to outperform competitor currencies within the last quarter, there is a possibility that Gov. Poloz decides to help keep the powder dry at the outset of the entire year,” said Jimmy Jean, senior economist at Desjardins Securities.

One challenge for that Bank of Canada is how to cope with the truth that the low loonie is impacting households negatively even while it’s didn’t spruce up Canada’s exports and manufacturing sector as hoped.

Derek Holt and the team at Scotiabank Economics note that the currency’s plunge couldn’t “have happened at a worse time” for Canada’s highly indebted households. The rising cost of imports add up to a “national pay-cut” said Holt, noting a sizable decline within the prices of what Canada sells to the world in accordance with what it will pay for imports.

That will definitely put pressure around the Bank of Canada to cut rates to ease the burden, but economists note that the 2nd 1 / 2 of the entire year will probably see a noticable difference that will allow the financial institution to begin normalizing policy.

Consensus currently sees a rate hike at the end of 2016, which economists say allows the loonie to finally start gaining ground against the U.S. dollar.

“We expect the Canadian dollar to stay around 71 US cents through the first quarter of 2016 before rising gradually thereafter,” said Dina Ignjatovic, economist at TD Economics.